Whether you are an angel investor or are looking to invest in established businesses, you need to be aware of your rights as stakeholder in the entity even when you are not intending to be involved in the operations of the business.

Pre-emptive right on issue of new shares (to maintain percentage shareholding)

Rights to remove directors with majority of shareholders in favour

Right to receive dividends

Additional Rights that can only be included in a Shareholders Agreement or a tailored Constitution, to name a few, are:

Right to inspect the books of the Company (not just the annual company reports)

Confidentiality and Non competition covenants from all Shareholders

Pre-emptive rights on disposal of shares by other shareholders

Requirement that all shareholders vote in the interest of the Company at all times

Right to partake in any offer made for shares owned by other shareholders or require other shareholders to sell their shares to achieve a sale of the business (Drag along and tag along rights)

Restrict the power of the Board by subjecting certain Board decisions to shareholders’ consent

Dispute resolution provisions both at Board and shareholders levels

Clear and reasonable exit mechanisms to enhance liquidity of the shares (as it is very difficult to sell shares in a private company to a third party when fellow shareholders do not take them up)

Set a time frame for the preparation of an annual plan and an annual budgets in order to keep track of where your investment is heading

A clear dividend and distribution policy setting out the frequency of distributions and whether there is any dividend reinvestment plan

Future funding obligations and proposed source or funding

To be entitled to an entrenched seat on the Board of Directors and be represented at Board level. Note: There is usually a shareholding threshold for board representation and you need to be clear on what this is.

Whilst a certain level of risk is acceptable in any investment, all investors should take care in their due diligence investigations and ensure that their investment is best protected in every possible way. This starts with a carefully drafted shareholders agreement which works hand in hand with the company's constitution.

Next Steps

Request a copy of the company’s constitution and shareholders agreement to understand your rights and obligations.

Negotiate terms to be included in the shareholders agreement to protect your investment.

Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.